Lenovo is suddenly China’s hottest tech stock

What was the world’s worst technology stock only months ago has become China’s hottest, staging a defiant comeback since it was booted off Hong Kong’s benchmark gauge.

Lenovo Group has seen its shares surge 42% in the nearly five months since the announcement of its removal from the Hang Seng Index — an increase that beats every other Chinese technology stock during the same period while outperforming the broader Hang Seng index that this month slumped into a bear market.

The rapid reboot of the PC manufacturer’s shares is a welcome surprise for investors who had grown accustomed to Lenovo being the world’s worst-performing technology stock, plunging 56% between March 2013 and April 2018 as it repeatedly missed turnaround targets for its embattled smartphone business.

The sales recovery story is particularly attractive in a bear market, at a time when a tech darling such as Tencent is facing growth bottlenecks

“Lenovo’s fundamentals are having a rebound, which surprised some investors,” said Linus Yip, a strategist with First Shanghai Securities. “The sales recovery story is particularly attractive in a bear market, at a time when a tech darling such as Tencent is facing growth bottlenecks.” Tencent has fallen 20% since Lenovo was removed from the Hang Seng gauge in June.

Driving the rebound is a revival in global PC shipments, which saw the fastest growth in six years in the three months ended June as Lenovo reported a better-than-expected net income of US$77-million during the period. Its loss-making smartphone unit, which used to be a big concern to investors, almost halved its losses year-on-year while it is benefiting from strong sales and shipment momentum in the global server business.

Short sellers are getting burnt as the stock soars: bearish interest fell to just 5.6% of free float from 16% in May, which was the highest in at least 12 years. Analysts have lifted their average target price by 20% since the day before Lenovo’s quarterly results, the second biggest increase among all MSCI China Index members, according to Bloomberg data.

Lenovo’s sales recovery comes at a good time for China as it looks to domestic brands amid a deepening trade war with the US, says Yip. “It was a quiet stock for a few years until recently. And the upside may not be fully priced in yet.” — Reported by Jeanny Yu, (c) 2018 Bloomberg LP